AUGUSTA — Maine municipal officials and business leaders filled the State House on Wednesday to argue over a proposal that would eliminate or reduce $40 million worth of tax breaks and economic development incentives to stave off an equal cut in state aid to cities and towns.

The proposal was touted by Democratic legislative leaders as fulfilling the state’s promise to share tax revenues with municipalities and prevent increases in property taxes and reductions in local services. Republicans, including Gov. Paul LePage, countered that the proposal could force some businesses to move out of state and endanger the state’s bond rating.

Additional Photos

Presque Isle Chief of Police Matthew Irwin is flanked by firefighters from his community Wednesday as he signs up to testify on potential cuts by the state to municipal aid. Cops, firefighters and town officials lined up to testify on the bill that would avoid a $40 million cut in municipal revenue sharing. Andy Molloy/Kennebec Journal

Waterville Mayor Karen Heck signs up to testify Wednesday at the Legislature’s Appropriations Committee in Augusta on potential cuts to municipal aid by the state. Andy Molloy/Kennebec Journal

The Republican argument centers on a plan to draw from the state’s $59.7 million rainy day fund to help balance the current two-year budget if lawmakers can’t agree on changes to tax breaks and economic development incentives that would avoid an automatic $40 million cut in municipal aid, also known as revenue sharing. The provision was built into the bipartisan budget enacted last year. So far lawmakers have been unable to reach an agreement that would prevent the cut in municipal aid.

The issue has also become more partisan. Republicans have accused Democrats of pushing tax increases and hurting businesses rather than making difficult spending cuts. Democrats counter that cutting revenue sharing will hurt homeowners and lead to dramatic cuts in municipal services.

“These funds are a partnership and an obligation the state has to our local communities,” said Rep. Peggy Rotundo, D-Lewiston. “We collect over $1 billion in economic activity from the revenue generated from Main Streets across our state. We owe it to our towns to return some of these funds to help keep property taxes from spiking for families and to help fund our schools, police and firefighters.”

Sawin Millett, the governor’s finance chief, has repeatedly warned that a Democratic proposal to draw from the state’s rainy day fund would adversely affect a key metric for agencies that assess the state’s ability to repay state-issued bonds.

Last year, Moody’s Investor Service assigned the state a negative outlook, in part because it had a “minimal” rainy day fund. Rebuilding the fund would improve the state’s bond rating, according to Moody’s 2013 analysis.

Democrats are backing other measures that they argue benefit large corporations at the expense of local property taxpayers. One provision would alter a popular business equipment tax reimbursement plan that has been vigorously supported by large businesses. Several companies, including General Dynamics, owner of Bath Iron Works, and the Pulp and Paper Association said during a lengthy public hearing Wednesday that the program is essential to keeping Maine competitive and retaining big businesses.

Democrats are also proposing elimination of a local property tax reimbursement program for some retail stores.

They argue that state revenues have increased under the LePage administration, but municipal aid has decreased 32 percent from fiscal 2012 to fiscal 2014. If the $40 million cut goes through, they said, revenue sharing will decline by 79 percent in fiscal 2015.

City officials, firefighters and police officers echoed the Democrats’ position on Wednesday during the hearing, which drew oral testimony from nearly 95 people, some representing business interests.

Mike Chasse, a city councilor for Presque Isle, said that his city’s budget is already in a “crisis situation,” according to The Associated Press. Since 2008, state aid has been reduced by $1.3 million, or roughly 12 percent of the city’s budget, he said. If revenue sharing is cut by $40 million, the city would lose another $477,000, he said.

The city has had to eliminate full-time employees, shut down its outdoor pool and cut back on police and firefighters, he told the committee.

“We’re at the point of where we really cannot cut anymore without losing significantly from our community,” he said.

Republican Rep. Tom Winsor of Norway said local and state government needs have to be balanced with those of private sector workers and businesses.

“We heard lots of testimony from town managers trying to protect their budgets, but the people I’m most concerned about are the ones who are hard at work right now in a mill or a food processing plant,” he said in a statement. “Without a strong economy, we’re not going to have sufficient budgets to argue about.”

Rep. Kathleen Chase, R-Wells, said the Democratic proposal was a non-starter.

“This proposal is a job-killer that ignores the elephant in the room, which is runaway Medicaid spending,” said Chase, the ranking House Republican on the Legislature’s budget-writing committee. “It’s a massive blow to Maine’s private sector economy that could mean many Mainers losing their jobs just as they’re getting back on their feet.

The looming impasse over the proposal could heighten the hurdle for passage of a supplemental budget bill. Last week the LePage administration said the state faces a $119 million budget shortfall that is almost completely driven by spending and revenue imbalances in MaineCare, the state’s Medicaid program.

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